Is Global Capitalism Out Of Is Global Capitalism Out Of ControlControl??

Howard Davies

Director

The London School of Economics

Hay

23 May 2008

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Structure• the charge sheet

• how the crisis has evolved

• the likely economic and geopolitical consequences

• the needed responses

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“We are in the midst of a financial crisis the likes of which we haven’t seen since the Great Depression”

George Soros

‘The New Paradigm for Financial Markets’

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Case-Schiller Index

Source: www.wikipedia.org

S&P/Case -Schiller U.S. National Home Price Index

0

50

100

150

200

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87

- Q

1

19

89

- Q

1

19

91

- Q

1

19

93

- Q

1

19

95

- Q

1

19

97

- Q

1

19

99

- Q

1

20

01

- Q

1

20

03

- Q

1

20

05

- Q

1

20

07

- Q

1

20

07

- Q

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Year & Quarter

Pe

rce

nta

ge

S&P/Case -SchillerU.S. National HomePrice Index

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Subprime Mortgage Pool Securitization

Residual/EquityBBB

A

AA

AAA

Capital Structure Containing Subprime Loans

PRINCIPAL PAYMENTS

Principal payments are made sequentially from the top of the capital structure to the bottom

LOSSES

Mortgage pool losses are allocated sequentially from the bottom of the capital structure to the top

100%

28%

20%11%7%

0%

Note: Ratings are Rating Agency defined

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Resecuritisation

BBB

A

AA

AAA

Residual/Equity

SUPER SENIOR

AAA

AAA

AA

A

BBB

Equity

Capital Structure Containing Subprime Loans

Subprime Mezzanine CDO Containing BBB Subprime Bonds

100%

28%

20%

11%

7%

0%

11%7%

11%

8.6%

7%

100%

40%

0%

CUMULATIVE LOSSES

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Recent ABX BBB Price HistoryPrice

Note: ABX BBB – Standardised basket of 20 home equity; ABS reference loans from home equity deals (issued within 6 months prior to index issue date

Source: Markit Partners

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Global Growth

1 In per cent. The dashed lines show the consensus forecasts made at the end of the preceding year; the dots show forecasts for 2007 abd 2008 as of December 2007. Annual changes in real GDP and consumer prices. Average of countries available in Consensus Economics.

Source: Consensus Economics; national data; BIS calculations.

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Global Inflation

1 In per cent. The dashed lines show the consensus forecasts made at the end of the preceding year; the dots show forecasts for 2007 abd 2008 as of December 2007. Annual changes in real GDP and consumer prices. Average of countries available in Consensus Economics.

Source: Consensus Economics; national data; BIS calculations.

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XXX

1 Sixteen OECD countries; weighted averages based on 2000 GDP and PPP exchange rates.

2 Relative to nominal GDP; 1995=100

Sources: IMF; OECD; Bloomberg; national data; BIS calculations and estimates.

2

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XXX

Sources: OECD; Bloomberg; Datastream; Merrill Lynch; JPMorgan Chase; national data

1 1995=100

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Sources: IMF; CreditFlux Data+; ISDA; national data; BIS calculations.

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House prices increase in Europe

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Sovereign Wealth Funds – Top Ten by Assets

Source: www.wikipedia.org

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Top 10 Global Banks by Market Cap

Ranking Bank Current Market Cap

1 Industrial & Commercial Bank of China $252, 814

2 HSBC Holdings PLC $202, 254

3 China Construction Bank $195, 387

4 Bank of America Corporation $163, 196

5 JPMorgan Chase & Co $158, 375

6 Citigroup Inc. $124, 054

7 Bank of China Limited $107, 507

8 Wells Fargo & Company $96, 866

9 BNP Paribas $94, 259

10 Banco Bilbao Vizcaya Argentaria $86, 816

Source: www.corporateinformation.com/Top-100

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Nominal GDP

Financial depth

Source: McKinsey Global Institute Global Financial Stock database

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Seven areas of change

1. Asset prices and monetary policy

2. Tighter controls on leverage

3. More dynamic reserving policies

4. Accounting and ratings changes

5. Better risk management

6. Redesigned pay incentives

7. Stronger political support for regulators

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